FAQ's on Real Property Tax Law Section 581-a

The State Legislature in 2005 (chapter 714) added section 581-a to the Real Property Tax Law (RPTL) to give the owners of residential rental properties, subject to regulatory agreements restricting occupancy in accordance with an income test, the right to have their properties valued, for real property taxation purposes, by the "capitalization of income" method. The following questions and answers are intended to address common issues concerning section 581-a.

Q. When did section 581-a become effective?A. Chapter 714, which added section 581-a, became effective on October 11, 2005, and applies to assessment rolls based on taxable status dates occurring on or after January 1, 2006.

Q. Which State agency is responsible for adopting regulations regarding section 581-a?A. The State Division of Housing and Community Renewal (DHCR) (www.nysdhcr.gov) is the only State agency with such authority.

Q. Has DHCR promulgated regulations regarding section 581-a?A. Yes. DHCR adopted and promulgated a new Part 2656 to Title 9, NYCRR, which applies to section 581-a. Part 2656 became permanently effective on November 1, 2006.

Q. Does section 581-a apply only to residential rental properties that are subject to New York State regulatory agreements?A. No. DHCR rules provide that section 581-a applies to residential rental properties subject to "any agreement, including but not limited to a contract or covenant, between the property owner(s) and the municipal, state or federal government, or an instrumentality thereof, which requires the property owner(s) to rent at least twenty percent of the residential units to tenants who qualify in accordance with an income test" (9 NYCRR §2656.2(b)).

Q. May section 581-a apply to a single family home?A. Yes, if the single family home is a rental property subject to a regulatory agreement that complies with 9 NYCRR §2656.2(b).

Q. May the owner of a residential rental property that is subject to a PILOT (payment-in-lieu of taxes) agreement that went into effect before section 581-a became effective request that the property be valued pursuant to section 581-a?A. RPTL, section 581-a, does not address existing PILOT agreements. The specific terms of a PILOT agreement must be negotiated by the parties to the agreement.

Q. May a residential real property subject to a PILOT agreement receive the benefit of §581-a for the purpose of special district charges?A. Yes, unless the PILOT agreement provides otherwise.

Q. What documentation must the owner of a residential rental property submit to the assessor before the assessor is required to value the property in accordance with section 581-a?A. DHCR rules state that the property owner must provide the assessor "with a copy of all applicable regulatory agreements and, on an annual basis, income documentation prior to the taxable status date" (emphasis added) (9 NYCRR §2656.3).

Q. What types of financial records constitute "income documentation"?A. DHCR rules define "income documentation" as "the most recent financial statement, independent auditor's report and rent roll for the residential real property or, if the most recent financial statement does not reflect twelve (12) months of occupancy, the most recent operating budget approved by the municipal, state, or federal government, or instrumentality thereof, that is party to the regulatory agreement" (9 NYCRR §2656.2(c)).

Q. May an assessor question the accuracy of expenditures and/or revenues stated in a property owner's income documentation?A. Neither RPTL, section 581-a, nor Part 2656 of DHCR's regulations prevents an assessor, subject to the boundaries of what is considered sound custom and practice, from verifying such items and requesting further substantiation.

Q. What methodology is to be used by an assessor when valuing a residential real property pursuant to section 581-a?A. The assessed value of the property is to be determined "using the income approach as applied to the actual net operating income, after deducting for reserves required by any federal, state or municipal programs" (RPTL, §581-a). "Net operating income" is defined by section 581-a as "the actual or anticipated net income that remains after all operating expenses are deducted from effective gross income, but before mortgage debt service and book depreciation are deducted." The assessor must disregard any "federal, state or municipal income tax credits, subsidized mortgage financing, or project grants, where such subsidies are used to offset the project development cost in order to provide for lower initial rents as determined by regulations promulgated by the division of housing and community renewal" (Ibid.).

Q. Does the "effective gross income" of a qualified residential rental property, for the purposes of section 581-a, include rent paid by the tenants and governmental rent subsidies paid to the property owner?A. Yes, "effective gross income" includes both types of income. The latter category of income may consist of Section 8 rent voucher payments paid by a governmental agency to the property owner.

Q. May a Rural Rental Housing Loan Agreement qualify as a "regulatory agreement" for the purposes of 9 NYCRR §2656.2(b)?A. Yes. If the assessor is uncertain whether a purported agreement is a Rural Rental Housing Loan Agreement or another type of qualified regulatory agreement, he or she should ask the applicant to obtain confirmation from the agency that approved the agreement.

Q. Has DHCR done any studies concerning applicable capitalization rates for rental properties that are subject to regulatory agreements?A. No.

Q. What types of reserves are to be deducted when the "net operating income" of an eligible residential rental property is calculated pursuant to section 581-a?A. Reserves required by any applicable federal, state or municipal regulatory programs are to be deducted. If the assessor is uncertain whether a purported reserve payment is required, he or she may ask the property owner for additional documentation.

Q. If the property owner does not provide the assessor with the regulatory agreement and the required income documentation on or before taxable status date, may an assessor decide not to use the income approach prescribed by section 581-a to value an otherwise qualified residential rental property?A. The applicable DHCR regulation (9 NYCRR §2656.3) clearly states that "[t]he property owner(s) shall provide the local assessing unit with a copy of all applicable regulatory agreements and, on an annual basis, income documentation prior to the taxable status date." If the assessor does not receive the required regulatory agreement(s) and income documentation on or before the taxable status date, the assessor may assume that the rental residential property does not qualify under §581-a, and value the property using any one of the conventional property appraisal methods (cost, comparative sales or income capitalization) the assessor deems appropriate. However, failure to furnish income documentation by the taxable status date does not preclude the owner from ultimately establishing eligibility under section 581-a by challenging the tentative assessment during the statutory grievance period and providing income documentation at that time. See, Matter of Warrensburg Commons LPT v. Town Assessor of the Town of Warrensburg, 2010 NY Slip Op 00624.